Abolition of 55% "Death Tax" on Pensions

Abolition of 55% "Death Tax" on Pensions

Chancellor George Osborne announced at the Conservative Party conference in Birmingham that he will abolish the 55% tax currently payable on pension funds passed on after death.

This announcement is the latest of a number of reforms to overhaul the pensions system, which strikes another blow to annuities, and will take effect from April 2015.

What are the current rules?

Under current rules, any pension bequeathed to savers’ beneficiaries is subject to tax at 55% in the case of those aged 75 or over, and the marginal rate of around 20% for those who die younger.

What are the changes?

The current 55% tax payable when pension funds are passed on after death is to be axed from 2015. As Mr Osborne said: "People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. ... The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down."

To whom does the reform apply?

Retirees who have not started to draw their pension and are still under 75, will be able to pass on money in their pension pot tax-free to their children and grandchildren upon their death.

Who will benefit?

The families of hundreds of thousands of people: the winners in the policy change will be those who are beneficiaries of a defined pension fund left to them by someone aged under 75 whose pension was already in a drawdown account. Beneficiaries of pension funds left to them by someone aged 75 or over will also now be able to take the funds through drawdown at their marginal tax rate – previously this was only available to dependants.

Who may lose?

There are fears that some retired people may be put off spending any of their pension savings in order that the income can go to their children and grandchildren tax-free. The government will be down on tax revenue to the tune of a total £150 million per annum, which could prompt the Treasury to try to raise the shortfall from elsewhere, maybe through yet more punitive investigative measures.

Any upsides?

This is certainly the abolition of a pension tax, although it only applies from April 2015, and to contributions into pensions made from then. There are also some aspects of this change that won’t come into force until 2016–17, but be assured that we’ll keep you posted about these.